Economics: Etymology and Resources

Etymology of Economics

• Economics comes from the Greek word "OEIKONOMIA," meaning the art of household management related to budgeting.
• Economics became a science in 1776 with Adam Smith's "The Wealth of Nations."
• Wealth is related to a country's resources.
• Adam Smith identified land and labor as the first two economic resources.
• Additional resources such as capital and entrepreneurial ability were identified later by other economists.
• Resources are classified as either non-economic or economic.
• Non-economic resources are free and abundant with no need for efficient allocation.
• Economic resources are scarce, limited, versatile, and require allocation based on price.
• Economic resources are also known as factors of production.
• These are divided into human and non-human resources that have corresponding prices :

Human Resources

• Labor is mental and physical effort that earns salaries or wages.
• Entrepreneurial ability organizes of production, takes risks, innovates, and earns profit or royalties.

Non-Human Resources

• Land includes all natural resources that have rent or lease value.
• Capital includes man-made goods (with interest) used to produce other goods.
• Economics is the social science dealing with the efficient allocation of scarce resources to satisfy unlimited human needs and wants.
• Economics relates to the concept of Scarcity.
• Human needs and wants are unlimited, insatiable, and constantly changing.
• Man's needs and wants are categorized by importance, origin, and scope.
• By importance as basic, secondary, or luxury.
• By origin as built-in or created.
• By scope as public or private.
• Needs and wants are satisfied by utilizing resources and creating products.
• Resource utilization involves a resource mix or technology that is labor-intensive or capital-intensive.
• Products can be goods or services.
• Goods are tangible and material.
• These can be consumer/direct/final goods for end-use or producer/capital goods for further production, including raw, intermediate, or semi-finished materials.
• Services are immaterial and intangible.

Fundamental Economic Activities include:

• Production, which creates products.
• Distribution, which makes goods available through the needed channels to consumers.
• Exchange, which involves giving money in return for products.
• Consumption; the use of products
• Public Finance, which consists of government sourcing and using funds.
• Fundamental economic questions include:
• What to produce?
• How to produce?
• How much to produce?
• For whom to produce?
• The Production Possibilities Curve (PPC or PPF) relates to these questions.

Economic Systems

• Traditional economies rely on customs and traditions passed down through generations to answer the fundamental economic questions; based in agriculture, and using barter as the main exchange system.
• Command economies/planned/controlled/totalitarian/communist economies rely on the government or a central-planning body to answer the economic questions; resources are owned by state for egalitarianism, with rationing in exchange for forced labor.
• Market economies, known as free enterprise or laissez-faire/capitalist economies, answer economic via prices based on "invisible hand" (demand & supply); monetized exchanges, free enterprise, competition and profit, consumer sovereignty, and inequality exist.
• Mixed economies use a combination of methods to answer fundamental economic questions.

Ten Principles of Economics:

• Focuses on how individuals make decisions, how people interact, and how the economy works.

How Individuals Make Decisions

• People face trade-offs that require acknowledging life’s trade-offs.
• "There is no such thing as a free lunch."
• Economic goals like efficiency vs. equality exist.
• Equality means benefits are uniformly distributed among people.
• Efficiency means society maximizes benefits/resources.
  • Allocative efficiency is when consumer prices reflect private marginal cost of production.
  • Productive efficiency is when firms combine resources for lowest possible cost.
  • Technical efficiency relates output obtainable from a given input.
  • X-efficiency (originated by Harvey Leibenstein in the 1960s) is when firms get the greatest output from a given input.
  • Dynamic efficiency is technological progress/innovation.
  • Social efficiency exists when all private and external costs and benefits are considered when producing an extra unit.
• The cost of something is what you give up to get it.
• Making decisions requires comparing the costs and benefits of alternative actions.
• The total cost is explicit (out-of-pocket costs) plus implicit costs (Opportunity cost, or foregone benefit).
• Rational people systematically work to achieve their objectives.
• Marginal change means a small incremental adjustment to a plan of action.
• Rational decision makers act if marginal benefits outweigh marginal costs; marginal decision making explains economic phenomena such as the Water-Diamond Paradox, where willingness to pay depends on marginal benefit/utility rather than total utility/usefulness.
• incentives induce actions and things that induce people to alter their actions or behavior.
• Reinforcements can be positive (rewards/merits) or negative (punishments/demerits).

How People Interact

• Trade makes everyone better off by allowing countries to specialize.
• Allows greater choice of goods/services at lower costs.
• Market economy allocates resources through decentralized decisions of firms and households interacting in product markets.
• Price system signals market activities, prices determined through supply/demand's "invisible hands".
• Governments enforce rules, maintain institutions that are key to market systems, and enforce property rights.
• Intervention is needed in market failure situations.
  • Market failure happens because of externalities (one person's actions affecting a bystander), pollution, or market power.

Working of the Economy as a Whole

• A country’s standard of living improves as citizens are able to produce more goods and services.
• Standard of Living, based on the Human Development Index (HDI) is based on GDP per capita, income distribution, equality, life expectancy, literacy and unemployment.
• Standard of Living is related productivity measured via amounts of goods and services produced by one unit of labor input, and labor productivity relies on having a well-educated workforce, tools, and access to technology.
• Printing excessive amounts of money causes sharp rises in prices throughout the economy (inflation).
• Monetary inflation is caused by overprinting, leading to demand-pull inflation.
• Therefore there is a positive relationship between the price level total wealth and the quantity of money.
• Society faces short-run trade-offs between rising inflation and falling unemployment
• The Philips' curve represents this trade-off.

Methodology of Economics

• Observation, definition, deductions, empirical verification, and policy formulations occur across three phases:
• Descriptive economics includes observing past economic events
• Theoretical economics uses definitions, assumptions, deductions, and verifications to answer the question "Why?".
• Applied economics uses this to formulate and apply solutions/policies.

Branches of Economics

• Positive economics deals with objective statements and "what is", using verifiable facts that stem from observation and description.
• Normative economics deals with subjective statements and "what should be," using facts, value, judgements, and prescriptions, across analysis and policy.
• Value Judgements use belief systems, customs, traditions, and environmental considerations in policy formulation.

Approaches

• Microeconomics studies individual units, while macroeconomics studies the economy as a whole.
• Economists may disagree due to differing scientific/judgement or differing values vs reality.